THE DOCTRINE OF PRIVITY OF CONTRACT
Meaning
The doctrine of privity of a contract is a common law principle which implies that only parties to a contract are allowed to sue each other to enforce their rights and liabilities and no stranger is allowed to confer obligations upon any person who is not a party to contract even though the contract have been entered into for his benefit.
For example- If A makes a promise to deliver some goods to B. Then in this case, if A breaches the contract then only B has a right to prosecute him and no other person can prosecute him.
Essentials of Privity of contract
1. A contract has been entered into between two parties:-
The most important essential is that there has been a contract between 2 or more parties.
2. Parties must be competent and there should be a valid consideration:-
Competency of parties and the existence of consideration are pre-requisites for application of this doctrine.
3. There has been a breach of contract by one party:-
Breach of contract by one Party is the essential requirement for the application of the doctrine of privity of contract.
4. Only parties to contract can sue each other:-
Now after the breach, only Parties to a contract are entitled to sue against each other for non-performance Of contract.
As a general rule, both Indian and English law are similar to each other that only parties to contract can sue each other.
Tweddle v. Atkinson - In this case, two fathers agreed that if their children got married, both fathers will pay a sum to the groom. The children got married. The groom’s father paid his part of the agreed sum but the bride’s father failed to pay and subsequently died. The groom instituted this action against his father-in-law’s estate for the recovery of the sum. The court held that the contract could not be enforced because the groom was not a party to the contract even though it was made in his favor.
English law vs Indian Law
As a general rule, both Indian and English law are similar to each other that only parties to contract can sue each other.
Tweddle v. Atkinson - In this case, two fathers agreed that if their children got married, both fathers will pay a sum to the groom. The children got married. The groom’s father paid his part of the agreed sum but the bride’s father failed to pay and subsequently died. The groom instituted this action against his father-in-law’s estate for the recovery of the sum. The court held that the contract could not be enforced because the groom was not a party to the contract even though it was made in his favor.
Dunlop Pneumatic Tyre & Co. vs. Selfridge & Co.- In this case, the plaintiff was into the manufacturing of tyre. The plaintiff sold some goods to Dew & Co. The companies entered an agreement to the effect that Dew & Co. shall maintain the price list of the goods and shall not sell the goods below the price list.It was also agreed that Dew & Co. shall obtain an undertaking from any company it sells to the goods to. In the undertaking, such company shall also promise not to sell the goods below the price list. Dew & Co. sold some tyres to the defendant and obtained the required undertaking from the defendants. However, the defendant reneged on the undertaking by selling the tyres to another customer at price below the price list. The plaintiff sued the defendant for damages and breach of contract. The House of Lords dismissed the plaintiff’s suit on the following grounds: There was no enforceable contract between the plaintiff and defendants. Even though the plaintiff was a beneficiary under the contract, he is not a party to it. It is a stranger to the contract and cannot claim any right under the contract.
In the Indian context also this concept of privity of contract is similar, the only difference being that in India a person who is stranger to consideration can sue whereas in England he cannot.
Consideration is the most important element of any contract existing between the parties unless there is consideration a contract is considered to be void. It is defined in section 2(d) of the Indian contract act 1872. Consideration is considered as the foundation of every contract and it forms the basis of it.
A stranger or a person who is not a party to a contract can sue on a contract in the following cases:
If a contract is made between the trustee of a trust and another party, then the beneficiary of the trust can sue by enforcing his right under the trust, even if he is a stranger to the contract.
For example: A’s father had an illegitimate son, B. Before he died, he put B in possession of his estate with a condition that A would pay B an amount of Rs 1,00,000 and transfer half of the estate in B’s name, once he becomes 21 years old. After attaining that age when B didn’t receive the money and asked A about it, he denied giving him his share. B filed a suit for recovery. The Court held that a trust was formed with B as the beneficiary for a certain amount and share of the estate. Hence, B had the right to sue upon the contract between A and his father, even though he was not a party to it.
If a contract is made under a family arrangement to benefit a stranger (person not a party to the contract), then the stranger can sue in his own right as a beneficiary of the contract.
Examples:
In the Indian context also this concept of privity of contract is similar, the only difference being that in India a person who is stranger to consideration can sue whereas in England he cannot.
Role of consideration in Privity of contract
Consideration is the most important element of any contract existing between the parties unless there is consideration a contract is considered to be void. It is defined in section 2(d) of the Indian contract act 1872. Consideration is considered as the foundation of every contract and it forms the basis of it.
Exceptions to the Doctrine of Privity of Contract
A stranger or a person who is not a party to a contract can sue on a contract in the following cases:
1. Trust
If a contract is made between the trustee of a trust and another party, then the beneficiary of the trust can sue by enforcing his right under the trust, even if he is a stranger to the contract.
For example: A’s father had an illegitimate son, B. Before he died, he put B in possession of his estate with a condition that A would pay B an amount of Rs 1,00,000 and transfer half of the estate in B’s name, once he becomes 21 years old. After attaining that age when B didn’t receive the money and asked A about it, he denied giving him his share. B filed a suit for recovery. The Court held that a trust was formed with B as the beneficiary for a certain amount and share of the estate. Hence, B had the right to sue upon the contract between A and his father, even though he was not a party to it.
2. Family Settlement
If a contract is made under a family arrangement to benefit a stranger (person not a party to the contract), then the stranger can sue in his own right as a beneficiary of the contract.
Examples:
●A promised B’s father that he would marry B else would pay Rs 1,00,000 as damages. Eventually, he married someone else, thereby breaching the contract. B filed a case against A which was held by the Court since the contract was a family arrangement with B as the beneficiary.
●X was living in a Hindu Undivided Family. The family had made a provision for her marriage. Eventually, the family went through a partition and X filed a suit to claim her marriage expenses. The Court held the case because X was the beneficiary of the provision despite being a stranger to the contract.
●If A gives his Property in equal portions to his 2 sons with a condition that after his death all 2 of them will give Rs 20,000 each to C, the daughter of A. Now C can prosecute if any one of them fails to obey this.
3. Assignment of a Contract
If a contract is made for the benefit of a person, then he can sue upon the contract even though he is not a party to the agreement. It is important to note here that nominees of a life insurance policy do not have this right.
For example: An old lady, made an agreement with her daughter that she would gift her some landed property but the condition was that the daughter would pay her aunt some amount regularly as maintenance allowance. The daughter promised her aunt (mother’s sister), the maintenance money. However, later she stopped paying the money to her aunt. The aunt filed a case against her niece for not paying the money. The decision was in favour as the contract was made for her benefit.
4. Acknowledgment or Estoppel
If a contract requires that a party pays a certain amount to a third-party and he/she acknowledges it, then it becomes a binding obligation for the party to pay the third-party. The acknowledgment can also be implied.
Examples:
●If A enters into a contract with B that A will pay Rs.10,000 every month to B during his lifetime and after that to his Son C. A also acknowledges this transaction in the presence of C. Now if A defaults C can sue to him, although not being directly a party to contract.
●'A' sold her house to B. A real estate broker,C, facilitated the deal. Out of the sale price, C was to be paid Rs 50,000 as his professional charges. B promised to pay C the amount before taking possession of the property. She made five payments of Rs 7,000 each and then stopped paying him. C filed a suit against B which was held by the Court because B had acknowledged her liability by conduct.
When a person purchases a piece of land with the notice that the owner of the land will be bound by all duties and liabilities affecting the land, then he can sue upon a contract between the previous land-owner and a settler even if he was not a party to the contract.
For example: A owned a piece of land which he sold to B under a covenant that a certain part of the land will be maintained as a playground for children. B abided by the covenant and eventually sold the land to C. Though C was aware of the covenant, he built a house in the specific plot. When A came to know of it, he filed a suit against C. Although C denied liability since he was not a party to the contract, the Court held him responsible for violating the covenant.
If a person enters into a contract through an agent, where the agent acts within the scope of his authority and in the name of the person (principal).
For example: A enters into a contract with B through his agent C. But B makes the breach of the contract. Here, A can sue B for the breach of the contract even if the contract was made between B and C originally.
From the above discussion, we have seen that although only parties to contract can sue each other and no stranger is allowed to enter between the parties to sue. But with the development of time, the law has also developed and now even a stranger is permitted to sue to safeguard his interest under exceptional circumstances.
●'A' sold her house to B. A real estate broker,C, facilitated the deal. Out of the sale price, C was to be paid Rs 50,000 as his professional charges. B promised to pay C the amount before taking possession of the property. She made five payments of Rs 7,000 each and then stopped paying him. C filed a suit against B which was held by the Court because B had acknowledged her liability by conduct.
5. A Covenant Running with the Land
When a person purchases a piece of land with the notice that the owner of the land will be bound by all duties and liabilities affecting the land, then he can sue upon a contract between the previous land-owner and a settler even if he was not a party to the contract.
For example: A owned a piece of land which he sold to B under a covenant that a certain part of the land will be maintained as a playground for children. B abided by the covenant and eventually sold the land to C. Though C was aware of the covenant, he built a house in the specific plot. When A came to know of it, he filed a suit against C. Although C denied liability since he was not a party to the contract, the Court held him responsible for violating the covenant.
6. Contract through an Agent
If a person enters into a contract through an agent, where the agent acts within the scope of his authority and in the name of the person (principal).
For example: A enters into a contract with B through his agent C. But B makes the breach of the contract. Here, A can sue B for the breach of the contract even if the contract was made between B and C originally.
Conclusion
From the above discussion, we have seen that although only parties to contract can sue each other and no stranger is allowed to enter between the parties to sue. But with the development of time, the law has also developed and now even a stranger is permitted to sue to safeguard his interest under exceptional circumstances.
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Excellent work.. But in my opinion little bit lengthy. Else keep it up.
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